The IRS has announced special tax relief for leave-based donation programs set up by employers to aid victims of the “further Russian invasion of Ukraine” that began on February 24, 2022. Under a leave-based donation program, an employer may permit its employees to give up their vacation, sick, or personal leave in exchange for cash payments by the employer to charitable organizations. Ordinarily, leave-based charitable donations must be included in the donating employee’s income. In addition, the opportunity to elect such contributions usually raises the concern that eligible employees might be taxed on income that could have been donated because the ability to make a donation triggers “constructive receipt.”
Like similar recent guidance (e.g., see our Checkpoint article), this notice addresses both tax issues. First, cash payments that employers make to qualified tax-exempt organizations (as described in Code § 170(c)) in exchange for vacation, sick, or personal leave that their employees elect to forgo will not constitute income to the employees if the payments are made before January 1, 2023, for the relief of victims of the further Russian invasion of Ukraine. Such payments need not be included in Box 1, 3, or 5 of the employee’s Form W-2. Second, the mere opportunity to make a leave donation will not result in constructive receipt of income for employees. Electing employees may not deduct the value of the donated leave on their income tax returns. [EBIA Comment: Deductions by electing employees would result in “double-dipping” because the donated leave will already have been excluded from their income.] Employers will be permitted to deduct the contributions either as charitable contributions under Code § 170 or as trade or business expenses under Code § 162 if the applicable requirements are met.
EBIA Comment: Employers that have adopted or are considering adopting leave-based donation programs to aid the citizens and residents of Ukraine, refugees from Ukraine, or individuals working, traveling, or currently present in Ukraine will welcome the favorable tax treatment. For more information, see EBIA’s Fringe Benefits manual at Sections XXII.E (“Leave-Sharing and Other Donation Programs”) and XXII.B.2 (“Tax Trap: Giving Employees the Choice to Cash Out Vacation/PTO Days Can Create Tax Problems”). See also EBIA’s Cafeteria Plans manual at Sections III.B (“The Constructive Receipt Doctrine and the Code § 125 Safe Harbor”) and III.G (“Constructive Receipt and Cash-Out of Unused Vacation Days”).
Contributing Editors: EBIA Staff.